China mulls options to support yuan and curb outflows

China has studied possible scenarios for the yuan and capital outflows this year and is preparing contingency plans, according to sources familiar with the matter. The offshore yuan surged the most in a year.

The authorities had used stress tests, models and field research, said the sources, who asked not to be identified as the studies had not been made public yet.

Financial regulators had already encouraged some state-owned enterprises to sell foreign currency and might order them to temporarily convert some holdings into yuan under the current account if necessary, they added.

The State Administration of Foreign Exchange did not immediately reply to a fax seeking comment.

The reported plans come amid increasing pressure on the yuan from a resurgent US dollar, rising capital outflows and concern that US President-elect Donald Trump may make good on his threats to take punitive measures on China’s exports.

Policymakers in Beijing have recently taken a series of measures to tighten control of the currency market, including placing higher scrutiny on citizens’ conversion quotas and stricter requirements for banks reporting cross-border transactions.

“China has been challenged by capital outflows and declining foreign-exchange reserves, and policymakers are taking measures to solve the problem,” said Eddie Cheung, a Hong Kong-based foreign-exchange strategist at Standard Chartered. “Funds will continue to exit in the first half due to individuals’ purchases of the dollar and on concerns of US political uncertainty.”

The offshore yuan jumped 0.9 per cent to 6.8958 per dollar in late afternoon trade on Thursday. That was the biggest increase since January 2016. The currency traded in Shanghai climbed 0.3 per cent, the most since July, to 6.94. The Bloomberg dollar spot index fell 0.4 per cent.

China might also further sell US Treasuries this year if needed to keep the yuan’s exchange rate stable, the sources said, adding that the size of the reduction would depend on capital outflows and market intervention.

The country’s holdings of Treasuries declined to the lowest in more than six years in October as the world’s second-largest economy used its currency reserves to support the yuan.

Its currency stockpile has probably shrunk further after hitting a five-year low of US$3.05 trillion in November, according to the median estimate in a survey before data due as early as this week.

Capital outflows from China accelerated in recent months as the yuan suffered its worst year of losses against the dollar since 1994, declining 6.5 per cent. About US$760 billion left the country in the first 11 months of 2016, according to a Bloomberg Intelligence gauge. The yuan will decline 2.7 per cent for the rest of this year, according to the median estimate in a survey.

“The policies, if implemented, can help increase foreign-exchange supply in the onshore market and hence help defend the yuan in the short term,” said Carol Pang, vice-president for fixed income, currency and commodities at Zhongtai International Holdings in Hong Kong. “However, it won’t change market expectation of further depreciation.”